HealthEquity's (HQY) CEO Jon Kessler on Year-End AUM & Account Results Call (Transcript)

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HealthEquity (NASDAQ:HQY)

Year-End AUM & Account Results Conference Call

February 8, 2016, 8:30 AM ET

Executives

Frode Jensen - Executive Vice President and General Counsel

Jon Kessler - President and Chief Executive Officer

Stephen Neeleman - Founder and Vice Chairman

Darcy Mott - Executive Vice President and Chief Financial Officer

Analysts

Gregory Peters - Raymond James Financial Inc.

Peter Costa - Wells Fargo Securities, LLC

Lisa Gill - JP Morgan Chase & Co.

Alexander Draper - SunTrust Robinson Humphrey, Inc.

Randy Reece - Avondale Partners LLC

Mark Marcon - Robert W. Baird & Co.

Alexander Paris - Barrington Research Associates Inc.

Steven Wardell - Leerink Partners LLC

Operator

Good day, everyone and welcome to this HealthEquity Announces Year-End AUM and Account Results Conference Call. Please note, this event is being recorded.

And I would now like to turn the conference over to Frode Jensen, General Counsel. Please go ahead.

Frode Jensen

Thank you. Good morning and welcome. My name is Frode Jensen. I'm General Counsel of HealthEquity. Please be advised that today's discussion includes Forward-Looking Statements including predictions, expectations, estimates and other information that might be considered forward-looking. Throughout this morning’s discussion, we will present some important factors relating to our business, which could affect those forward-looking statements.

These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements. We encourage you to review the risk factors detailed in our annual report on Form 10-K filed with the SEC on March 31, 2015 and our subsequent periodic and current reports for a discussion of these factors and other risks that may affect our future results or the market price of our stock. Finally, we do not obligate ourselves to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events.

With that I’ll turn the call over to Jon Kessler.

Jon Kessler

Good morning everybody and thank you for joining us this morning to discuss growth results for fiscal 2016 which ended a few days ago on January 31. We tried to get this information to us quickly as we can after the close of fiscal year and I’m going to make some brief remarks and then Darcy, Steven and I are available to take your questions.

First, a very loud thank you, thank you to those responsible to today's results. HealthEquity's sales and marketing team partner relationship executives, service executives, implementation specialists and our delivery organization they delivered what is by far the most successful year of growth in HealthEquity's history. Thanks also to our network partners for all they do to support their employees and insured members in building health savings with HealthEquity.

My comments are going t be divided into discussions of HSA growth, AUM growth and network partner growth, all were robust and diverse. Let's first discuss HFA growth, HealthEquity ended fiscal 2016 with 2.1 million health savings accounts under management, an increase of 714,000 HSAs or 50% compare to a year ago. By comparison, net HSA growth was 449,000 in fiscal 2015 and 290,000 in fiscal 2014.

There are several factors that accounted for our outsized HSA growth this year. First, new HSA openings exceeded 593,000 and that’s 24% more than in fiscal 2015. Our sales team won and they won a lot. New HSA members were added from employer partners, added in previous years and as in past years account growth from employer and health plan network partners was about evenly divided.

HealthEquity also benefited from the trend of banks exiting the HSA business something we predicted would happen at the time of our IPO. Successfully transitioning approximately 160,000 HSAs from the Bancorp Bank, this trend will continue in fiscal 2017 with the previously announced transfer of the HSAs of M&T bank taking place in Q1 and our ongoing partnership with M&T to grow the portfolio as more employers and individuals gain HSA qualified health insurance.

Next, HFA retention remained very high, 97.4% of HSAs opened at the beginning of fiscal 2016 remained opened at fiscal year-end. The comparable figure was 98.3% for fiscal 2015, 97.7% for fiscal 2014. As you all know, we used proprietary technology and our purple culture or remarkable service to try and create lifetime health savings relationships with our HSA members and clearly that is working.

As we expected, uncertainly around the Cadillac Tax has not in our view had any impact on HSA growth. Employers' health plans and consumers have always dealt with regulatory uncertainty, but what's driving HSA growth in our view is the growing recognition of the compelling economics of HSAs within a still largely un-penetrated market. We cannot leave the HSA grow discussion without a knot to the operational accomplishments of our team and partners including Visa and our Card Processor Total Systems or TSYS.

In on-boarding and welcoming new HSA members to HealthEquity, the team on boarded three quarters of 1 million HSAs this year including Bancorp. Q4's on-boarding alone totaling over 550,000 HSAs would have been enough to make HealthEquity one of the Top-10 HSA providers in the country had we started the quarter at zero. Our member services specialists were available every hour of everyday to help our members navigate the world of healthcare payments, identify savings opportunities and point the useful tools from across our ecosystem that their employer or insurer may provider.

In January alone the busiest month of our fiscal year, our member education specialists took more than 274,000 calls and did so while meeting the same purple service and quality standards we aspired to every month of the year. What is important about this performance is that it speaks to HealthEquity's capacity for growth going forward.

Tuning to assets under management, HealthEquity ended fiscal 2016 with 3.7 billion in AUM, an increase of 1.3 billion or 56% compare to a year ago. By comparison, AUM growth was 737 million in fiscal 2015 and 461 million in fiscal 2014. As in the past, newly opened HSAs had relatively low balances much of the growth came from HSAs opened in prior years and we expect this year's large numbers of new HSAs will be a source of growth next year and for years to come.

Cash AUM grew 58% year-over-year, in the fourth quarter alone we on-boarded nearly $1 billion of AUM. I am particularly pleased to report that the significant growth in cash deposits has been fully accommodated by our depository relationships. And the custodial interest rates have been maintained at levels consistent with what we have reported to you in prior periods.

The long-term nature of and diversity in our depository bank partnerships served us very well as did the team skill at showing our bank partners Health Equity's value as a strong steady and extraordinarily predictable depository partner. Something we have done over more than a decade of operation.

Invested AUM grew 42% to $406 million despite rising market volatility throughout the year, which is of course something with which we are all familiar. The number of HSA members who invest grew 46% but it's still low as a percentage of total HSA membership reflecting the opportunity ahead of us as more consumers grasp the potential of HSAs to accumulate savings tax efficiently. For example, 10-days ago the Wall Street Journal's retirement expert Anne Tergesen published an article headlined HSAs offer tax benefit beyond 401K, it's a good REIT.

Turning to network partners, as many of you know we spoke about updated numbers on our network partners in early January. As in past years we wanted to do this as soon as could and unlike the accountant AUM metrics these numbers don't change between early January and fiscal year end, but this call affords me an opportunity for a bit more color around those numbers.

Health Equity now has 513 network partners up from 340 last year and a 197 two-years ago. Our network partners are comprised of two groups, large employers and health plans. These groups help us to reach consumers, but also benefit from a sustained cost savings that an effective HSA program can generate, we call this B2B2C and it works.

Large employers represent 433 of our 513 network partners, up from 270 last year and a 140 two-years ago. Beyond the numbers the steady increase in the large employer group is widespread across industries speaking to diversity in the HSA market overall. For example, our new partners include the unquestioned leaders in categories ranging from big box retail to investment banking and semiconductor manufacturing to potato farming. Those fries are good.

Contributing to this growth, our network partner relationship renewals were extremely strong with no material losses. The number of health plan network partners increased from 57 two-years ago to 70 last year to 80 at fiscal year end. Notably, we expanded our partnerships within the BCBS system and with integrated health plans at the local level.

Just like account growth, the increase in our network partners is indicative of the significant embedded growth opportunity ahead of us, as more and more health benefits are HSA compatible year after-year-after-year.

So let me close with some comments on customer diversity. The sales growth we saw in FY 2016 in terms of HSAs, AUM and network partners has been very wide spread as I mentioned. As of January 31 no network partner accounts for more than 6% of Health Equity HSA. What does this mean for investors? Combined with the inherent stickiness of HSAs, because only the consumer can close the Health Equity account, it means a high degree of visibility to revenue going forward. When added to our growth, profitability and the competitive advantage we continue to demonstrate including with the strong sales performance we're reporting today. It's a pretty powerful package.

With that let's open the call up to questions for Steve, Darcy and I. Operator.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first from Greg Peters with Raymond James.

Gregory Peters

Good morning and congratulations on your results. I had just three quick questions for you. First of all, in this enrollment period, did you learn anything this year that was a surprise or deviation from prior year's experience?

Jon Kessler

I think Greg what we confirmed is something that I think if you step back from the day-to-day headlines and competition and so forth is obvious, which is that well people tend to talk about HSAs as something different or a whatnot from conventional health plans. What is actually happening is simply that more and more health plans for adopting designs that our HSA comparable.

And the reason that happening is happening is two reasons. The first is because, it's effective at reducing cost for individuals, for employers, for health plans et cetera, it does the job it is suppose to do in terms of aligning incentives to a significant degree with regard to day-to-day healthcare expenditures.

The second reason is the powerful tax incentives with regard to wealth accumulation that are part of an HAS. And as I say, I think it's easy to get lost in the detail of what we do, whether it's as a sales team promoting health equities specifically or looking at regulatory issues or working on execution and operations. But if you sort of step back, what you see is underneath all that the trends that are driving our market forward are trends that are based in mathematics not in a perception or the weather or what have you and I think that's really the biggest lesson from this year’s sales with sales cycle. Steve any comments?

Stephen Neeleman

Yes, I think the one thing we learn every year is even though for those of us that spend our lives in this industry and we think everyone knows that that a nature say is, the reality is we are still talking about 15%, 17%, 18% of the Americans even have access to them and we are really needing to just double down on the education. And so we are continuing to invest in whatever it is, videos, chat whatever we need to do to get people educate on the subject, because not only do they need to opt into these types of plans, but they need to properly fund them and search and invest. And so we always need to go back to the roots of great service, great technology, great education.

Gregory Peters

That actually duck tails in the second of my three questions, which is if you could speak a little bit about your marketing infrastructure and what was responsible for generating these types of results. And just give us a flavor of the resources you have available not only to produce these results, but what kind of investments you plan on making in the future?

Jon Kessler

I was just going to say, the thing I want to comment here and I want to throw to Steve on this, because he spent a ton of time on this, this year. Is what we try to do both in action and in recruitment within our marketing team is to create an educational infrastructure that is highly scalable. Education is tough, it takes a long time, we are Americans, we are not dumb, we are just busy. But what Steve has spent so much time on this year is working with our customers and listening very closely to really continue to refine the content of what we say and also the methods we deliver at the individuals as how they receive information changes. So Steve maybe you can speak a little bit.

Stephen Neeleman

So we have a very diverse group of network partners and off course consumers that come from them, and you can imagine Jon mentioned kind of this wide span from big box retailers on one side to people that are really tech savvy on the other side. And so what we've had to do in listening to them is build a team that can also the message in the medium. And so for example, tech for may say we would love for us to be able to send out an e-mail and invite everyone of our people to a WebEx so that you can explain the whole program go ahead and take 45 minutes.

Big box retailers says “no way not going to happen. We need a five minute video that consumer can watch on their smartphone, while they are on a break” and so we need to build a team and we are done so and we will continue to do so as we scale that can deliver the right message at the right time to the right person and that's kind of a phrase you got a lot in marketing land. And you know to Jon's point they are not dumb but they are busy. But the ability to kind of messaging where they are at and we will create [indiscernible] as we start to continue with a lot of this new ways to get the message to the right person.

Gregory Peters

And then on the health plan partners, is that fair to say that you are less focused on finding new health plan partners instead more focused on improving penetration there?

Jon Kessler

The short answer is no. In fact expressing - and I suspect the reason you are asking that is just the total numbers are smaller. Well there is only so many health plans out there, but in fact our health plan grows might have been even higher in terms of numbers without the offsetting effect of the shutdown of some of the ACA co-op health plans which has been widely reported. These weren’t a noticeable source of HSAs for us, but each one counts as one in this context.

But the short answer is that where there is a health plan that's not working for us or working with us I should say and we are not working for them. That's a partner we want and whether that's a partner that's one of our network partners that's a selling with us every day or whether it's about educating their team members to sell more effectively with us and explain the HSA solutions you know that's kind of what we want to do.

So it's always been the case that we see the increasing penetration, at the level of number of health plans and so forth as important, but we also think that as you say, that penetration is important too.

Gregory Peters

Perfect. Thank you for your answers and congratulations on the results.

Jon Kessler

Thank you Greg.

Operator

We will take our next question from Peter Costa with Wells Fargo.

Peter Costa

Good morning guys, thanks for the conference call today for giving the results. A couple of questions. First can you quantify for us the M&T Bank account size and give us some sort of an idea how big this is going to be? And perhaps why it's different or how it's different from other customers or other banking relationships that you got?

Darcy Mott

Yes, Peter. We expected that transition will happen in early March and as in Bancorp, once we know exactly how many accounts transfer over much AUM then we will report what that number is and it would probably be on our fourth quarter earnings call when we will disclose that. But with respect with the transition, it's actually very similar to Bancorp, we will bring those accounts on to our platform, we will transfer the AUM and then in this case we've actually have a - if they want to continue to sell and use HealthEquity is their HAS provider and so we have a marketing agreement with them to do that.

Jon Kessler

That’s really the key difference relative to the Bancorp transaction. M&T has a very healthy benefits advisory business within its service territory and actually a lot of work inspired their decision to exit HSAs custodianship and administration was the benefits group, articulating the need the need for a competitive product. And so what we are pleased about is that what we get here in addition to a new portfolio with some great customers and so forth is we get a great partner that will be marketing our products along with its other benefit services to its territory services coin within service territories. That’s the real difference, I think structurally it's similar to Bancorp and in terms of the transaction and as Darcy said, we will get you the numbers once it's done.

Peter Costa

Okay, can you talk a little bit about the Anthem relationship that you have and how that’s progressing at this point? I know you started with the actual accounts and your idea was to move to some other geographies from local markets down the road. Are you progressing on that and where doesn’t that stand and what is your expectation if they have to move to successful in requiring a [Cigna] (Ph)?

Jon Kessler

Yes so I think let me answer the second part of your question first. I really don’t want to speculate on the - of Cigna. They have got a lot balls in the air and I don’t really want to have another one. So I think that’s kind of their issue, what I have said in the past and would repeat here is that.

Our goal with Anthem is to be a good partner where they want to work with us and as you said the core of our strength with Anthem is really in the national accounts area where we have an outstanding partnership that is based on the mutual objective of winning new groups and in Anthem’s case the pertaining groups they have.

We do work with the local geographies meaning the smaller groups and so forth in certain markets primarily based on where we are integrated from a platform perspective versus their geographies where legacy platforms are in place that we haven't yet integrated with and I think we've made that comment before.

I will say this and its nothing I haven’t said before, is that we from a business model perspective believe that diversity is important. As I said at the JP Morgan's conference you can be virtually certain that at some point at least with regard to some component of what we do together that Anthem will want to try and do some of that themselves, they do that with every other business and they have tried it before in this business.

So that wouldn’t surprise me at all, but what we can do is be a great partner, keep working together, keep winning business together, something we were very successful at this year. And then, of course keep a diverse distribution base so that no party including Anthem is in a position to control our fate and that we are able to really focus on delivering value for our shareholders.

Peter Costa

Regarding that diversity, as you go forward here employees have access to their own HAS, but employees change guards from time-to-time, changing employers and perhaps health plans. is there going to be a point in time where you are going to have a more direct relationship with the employees rather than the network partners? Let's say the employers would need to have access to all the different HSA administrators out there, yourselves included similar to the delay, direct deposit works or payroll day where you move from bank account to bank account, different banks for different employees. Is that a way that you see HSA is developing down the road or you think HASs will save more time to health plans?

Jon Kessler

Well, there was two questions there, the first one was really about the relationship with the individual consumer and then the second one was about what we think the employers or health plans of alike will want to provide insurance of choice.

With regard to the relationship with consumer that exist today and it's a very important part of what we do. So that as we've talked about before, as individuals spin-off from the employer or health plan that's typically how they met us at HealthEquity where those accounts are growing in profitable and so forth. Those are individuals we want to keep and we try very hard to keep and certainly our numbers reflect a part of the fact that we do that.

So that's something it's there today and it really is something that I think relative to many B2B type technology companies or for that matter healthcare companies or SaaS companies and alike really differentiates HealthEquity. As I said in the prepared remarks, the only one that can fire us is the consumer.

As to your second question, it's funny it's a little bit of back to the future question, when I was elsewhere managing a business and starting to get into the HSA business that sort of what I thought people were going to want from day one and it turned I was wrong. And the reason I was wrong, is that what people were looking for was more than a financial account. If they are looking for health, they are looking for connectivity to services and I think as those services get better the connectivity to them will be even more important whether that's ultimately tied to a health plan or tied to something else.

I think that's what the consumers are going to want to and I think there was a time when very frankly folks who were not in the custodial business said, “oh, we're going to sort of make a lemonade out of a lemon and say our thing is you can go anywhere,” well you can go anywhere anyway. HealthEquity members who are connected to us through their employer who would prefer to have their money with first bank of anchorage can do so quite easily through our system.

So we kind of feel like that's an option that's available, but the reality is that most members are really looking for more than debits and credits and they are really looking for more than here is an option of investments have fun. They are looking for advice for the capital A as well as advice with lower case A. They are looking for help in understanding doctor bills and as I said, they are looking or connectivity to other kinds of services that can help them spend less. So as long as that's the case, we think we're going to be in pretty good shape.

Peter Costa

Great, thank you very much.

Operator

We'll take our next question from Lisa Gill with JPMorgan.

Lisa Gill

Thanks very much and good morning. So first off Jon, you talked about new opening, if I heard the numbers correctly at 24%, can you maybe just give us an idea of where the industry is growing right now?

Jon Kessler

That's a great question Lisa and rather than guess, I would expect that in the next a couple of days here that the folks from Devenir who try and get that information from others in the industry will come with their sense of where the industry is. And what I suspect we’ll find is that our overall growth rate they backup and say the 24% was sort of the growth of the second derivative that is the growth in new account openings.

What I can say is I would expect that our overall account in AUM growth rates, which were both have five handles on them will be significantly ahead of the industry as it has been prior years. But Devenir will speak to that and you and others can judge whether what people have reported, but I’m pretty comfortable that we're going to feel like the numbers that we've reported show our differentiation, certainly compared to last year industry grew in kind of low-20s and we grew in the mid-40s so.

Lisa Gill

Can you just remind me, does that report give that specific metric that you gave was just new account open breaks is given out for the understood?

Jon Kessler

I don't think they do, people report net numbers and so what you are going to get is aggregate growth as appose to how much they won and how much they lost. It would be actually wonderful if others did that. We want to be transparent as best we can and that’s why we look forward things like our account retention rates so that you know how well we did.

Lisa Gill

Right and then my second question would be around, you made a comment that the Cadillac Tax has had no impact at all, people know about it, the fact that they might be pushed out, regulatory thing just happen. Can you maybe though just give us a little more color especially on your conversations with employer around how they are thinking about health benefits. I know a few years ago, there was a lot of talk about pushing people into exchanges, it seems like there is less talk about that these days. Is this actually helping your business around HSA that they say, “look we're not going to put people into exchanges, we know we have to worry about the Cadillac Tax maybe longer down the road, but we have an issues today and that was got to figure out how to pay for these costs for our employees and HSA has a good way to solve for many of these problems.” I'm just curious of your conversations especially on the employer side.

Jon Kessler

Yes, it's a great question Lisa and I'll give my thoughts and then ask Steve to comment as well. Look I actually think if you think about the three points you mentioned which were exchanges, costs and regulatory factors. They all kind of come down to the same point that is in the mind of most employers large and small. And that is what they are all pointing to is a need/desire to one, I think employers have more or less decided that they will continue to provide group coverage.

There was an expectation by some at the onset of the Affordable Care Act and before that we would see rapid erosion of conventional group coverage. We certainly haven't seen that in the large group market. The trend in small group has been towards that direction forever and it continues to be, but we are not. So point one is, I think what is in the mind of employers is that they see the continued advantage in providing group health insurance. And as part of that the sort of services around it that help individuals navigate that health insurance make the most of it say for the longer term beyond year-to-year coverage like in HSA et cetera.

Let me just say, I think the second thing that employers are very aware of is the need to help individuals manage through that process and manage through the realities of it. There are articles every week there was one in the New York Times I believe this weekend about the complexities of dealing with healthcare finance and so providing real services that help, is something that employers care about.

And then lastly and I think this is what motivated a lot of the exchange discussion is, there is a desire on the part of employers to have greater visibility to the employers components of future costs. And I think one of the things that employers are discovering is that HSA sale plans where the premiums are relatively low provide a lot more visibility than something where it's all apart and so whatever is happening to healthcare expenses within your group in a given year is just going to hit the bottom line. So I think those are the three points that I think that are in the mind of employers. Steve do you want to comment on?

Stephen Neeleman

Do you have a question Lisa, go ahead.

Lisa Gill

No, no. I was going to say that's very helpful. I think for all of us sitting in the [seaport], sitting in weather they are investing your stock profile and your stock, I think these are just important points to try to understand the changing and evolving market and how was employers thinking about this. Because as Jon and I talked about on Friday, I think in a lot of investors' minds the Cadillac tax was the investment pieces or you know this fee in time where HSA adoption would vastly improve because of that. I think it's really important for people to understand you know the discussions that you are having and why people are adopting HSAs outside of the Cadillac tax.

Stephen Neeleman

I agree. I mean if you look at some of the employers that we've highlighted in our case studies, they have done it for I think two big reasons beyond purely a fine from the government. Number one they have done it, because they realize that this will help them put their cost on a different trajectory, right, rather than a 10% cost increase, a 3% or 4% which compounded over several years is very meaningful.

But I think kind of 1b in there, is they are starting to say, “if we're going to do what is right for our employees,” which is to help them build this nest egg, because they are going to need a quarter of a million dollars for a couple from the time they turn 65 until the time they don't need healthcare anymore.

Then we need to start helping them now and when you see companies starting to call their plan, their health investment plan instead of their high deductible plan you know we are starting to win that kind of battle of thoughts and that's what we are seeing which is pretty exciting.

Lisa Gill

Oh, very much so. And I guess if I could just sneak one last one in and that would be that the comment around the fact that you expect banks to continue to exit of the HSA business. Is there any way to quantify what those potential opportunities are over the next 12-months?

Jon Kessler

I guess the short answer is no, I was about to say yes until you added the next 12-months part. But look, obviously we're active in this market. We think we're really in a unique position as a great home for these assets and I'm using the term assets not in the dollar sense, but in respect to the customer relationships and so forth. We are not another bank, we are not competing to sell treasury services. We have a reputation for delivering a high quality service, we have a platform that was built to be flexible in terms of connectivity. And so we can meet special needs that do arise with your best customers and what have you, so we're going to be in there swinging at every opportunity would be kind of the way I would think about it.

Lisa Gill

Great, well congratulations on the results. Thanks very much.

Operator

We'll take our next question from Sandy Draper with Suntrust Robinson Humphrey.

Alexander Draper

Thanks very much, appreciate you guys doing the call this morning. Most of my questions have actually been asked and you got to be great of answering. Maybe one circle back on the employer side and looking at the market opportunity. I think the questions asked about the plan side, do you guys have sort of a target number, I think you are up to 433 employer partners over a 1,000 employees. Is there a target number that you guys think are potential number for that in terms of what the market opportunity is?

Jon Kessler

We haven’t really thought of it that way well there are certainly plenty of them. I will say, it's interesting Sandy you see some times these reports that will show that well you know 40% or whatever of employers that are of a given size have an HSA option or something along those lines.

And the reality is that that typically is the case that of the given size is very large, meaning you know 10,000 or 20,000 enough and having HSA option just means that could mean something like well they have got a product in place and there are that 15 guys in the finance team will use it and that's about it.

We win business from plenty of those every day. so we I guess continue to see and I think there are some speculation that is the large employer world is kind of getting worked over, we don’t really see at that way and this year's results are evidence of that. Not only did we add significantly to our numbers, but if you look at the quality of this group, it's of really high quality. So I guess in short, my answer is that there is plenty of green fields here within the large employer group.

Stephen Neeleman

The other thing I would add to that Jon is just that there is even additional fields that are opening up and we are starting to see movement even in municipalities and school districts and higher ed. And these areas that have been I think in large matter kind of that we are going to hold out because we think they are really rich benefit, it’s better for our people. And now they are starting to realize that really rich benefit is to get somebody HSA qualified plan with the reasonable deductable and a nice contribution.

And if you look at it just from a pure auctorial perspective that's a better plan than the $500, $750 deductible plan of co-insurance and a bunch of out of pockets, because people do a lot better with it. And so it's not just green filed opening up in kind of more the traditional early adopters tech financial services retail, but it's now even we are brining on union plans and things like that which are pretty exciting.

Alexander Draper

Great that's actually really helpful. So maybe a follow-up just to make sure I understand. I think that 24%, 25% growth in net new account, assuming that means those are accounts that are opened up with either clients or a partners that you did not have last year. So I want to clarify that and then maybe as a follow-up to my first question. Do you guys track or look at how many of the new account wins or not account, but new partners you win had an HSA before or this is the first time they are ever been rolling out a high deductible plan and associate to HSA? Thanks.

Jon Kessler

Darcy do you want to take that first one.

Darcy Mott

Yes on the first one that 24% includes - it backs up the Bancorp number, but it's all the new this year versus the new last year and so that's the growth I think Jon was - it's the second derivative of that number right. And that comes from both new partners Sandy and from existing partners that we've had before that's all of our accounts that are coming in. and so we had a healthy season of adding new partners as you know a new health plan partners probably doesn’t bring you that many new accounts in the first year, whereas the new employer especially if they are pushing this they may make a significant contribution. And the second question was?

Jon Kessler

I've got the second one. So the second question was I'm going to say roughly Sandy can you give us a breakdown among your employer wins for those who had an HSA before and those who haven’t, is that fair way to put it?

Alexander Draper

Correct, yes.

Jon Kessler

I don’t have a figure to hand, but let me say a couple of things. first is, we tend to focus because we provide these numbers on the large groups, we also raised the total number of employers we serve to more than 32,000 and so it's just worth reminding folks that we have pretty good visibility into what is happening across all types of employers large, medium and smaller ones. and I guess I would say directionally Sandy, it's the case that more of our wins in the just closed year are employers that previously had an HAS, but many of our wins have always been employers who had kind of offered some kind of option.

And again as I was commenting before, this is where I think some of these numbers that are occasionally published about some high percentage of employers of a given size already offer an HSA are very miscellaneous. Because offering a product at the plan level that you don’t price competitively and you say fine I don’t really care, the only people are going to sign up for are people who are solely interested in tax arbitrage and I'll take some of the arbitrage back by the plan pricing which is kind of how employers often sort of dip their toe into this things.

From our perspective that’s not really an offer, it's not an employer saying, I need to educate my population, it's saying I have few people who want this and there is not much harm in you giving it to them. So that’s always been a big part of our sales story, it’s you try a bank, you try an investment company, you try an administrator, you get serious you come to HealthEquity.

Alexander Draper

Great, actually that’s really helpful thanks and congratulations guys.

Jon Kessler

Thank you.

Operator

We will go next to Randy Reece with Avondale Partners.

Randy Reece

Good morning. I want to talk a bit I understand how increasing the number of health plan partners you are building distribution and gain market share. I always wonder what to do with the numbers on the employer partner. You have had very significant increases in the number of large and player partners and I’m trying to figure out how to interpret that exactly what kind of leverage you are going get out of that and how if at all we should incorporate those numbers into expectations for the company?

Jon Kessler

Well, maybe Steve you can talk a little bit about kind of the lifecycle of a typical new employer and maybe focus on any changes you have seen this year in terms of are they starting out relatively small and you expect future growth? or did you see more - you perceiving a more forward place that kind of thing?

Stephen Neeleman

Yes I wish it was the later, just because maybe the numbers is going to be even bigger have they been going forward place, so I think we are seeing similar strategies been implemented Randy that we have seen historically, which is whoever comes in first year we may get 10% or 15%. If they put a bit push out there and then hopefully by years two and three we are up in the 20%, 30% range.

We will have a blue bird that flies in every once in a while that maybe we will bring in already a few years of experience and maybe not have the experience they wanted on the administrator side. They wanted more, they wanted our investment solution whatever and then we will start off with the 25% pop in your one.

But usually it's kind of 5% to 10%, 20% over a couple of years. We have historically reported our adoption within those and while that’s a little bit of moving part target I can tell that we are still talking about kind of high single digits very low double digits adoption percentage within that base of large employers. Yes, so if you look at our - so in other words, we talk about leverage, there is still a lot of apples on the tree, if you look at that specifically those 400 plus large employers.

Randy Reece

There was a very substantial increase this year in the number of total employers, larger increase this year than last year but quite a bit, a nice SKU in those numbers in the additions?

Jon Kessler

The short answer is no. If you look at the total eligible's across our employer base and then I’ll say look average eligible's it's about the same, so maybe I can leave it at that.

Randy Reece

Alright very good. Thanks.

Jon Kessler

I guess a way to put it this when you are adding these kinds of numbers, I’m going to kind of - the low of average starts to way in and so it's starts to look like the broader universe.

Randy Reece

Thank you.

Operator

We will take our next question from Mark Marcon with Robert W. Baird.

Mark Marcon

Good morning and thanks for taking my question. First, with regards to the organic growth in terms of the number of accounts, can you talk a little about the source in terms of - from new employers versus existing employer partners? In other words, what was the growth within the old base that basically ended up seeing an increase in terms of adoption?

Jon Kessler

Well the way we talk about this Mark is in terms of new network partners versus existing network partners. And it's in about in a given year for every one account we get from a new network partner, we will get four from existing. We haven't fruit finish calculating those numbers this year, but we will make sure we will and perhaps it’s something we can touch on when we report first quarter.

Mark Marcon

Alright, and then with regards to the health plans that you have, can you just talk a little about the level of the percentage that the Top-Five or six plans compose in terms of the partnerships, other source of…

Jon Kessler

Can you repeat that one more time? I had a little trouble hearing you.

Mark Marcon

Just in terms of the health plan partnerships, you obviously have a whole slew of them 80, but if we just a take look like the Top-10 or the Top-Five what percentage of the account relationships are through those or in partnership with.

Jon Kessler

So as I said in the prepared remarks and I'll let Darcy add any further comment on this. I'll float it in, but there is no network partner that has more than 6% of our total account relationship and so obviously it goes down from there. I think one thing that maybe less obvious than it seems is that one of the benefits of having very strong relationships with blues plans with the local providers and regional hospital systems is that when you can make an HSA style plan work, it itself has the effective growing adoption.

so I'm always surprised to see the outsized contributions from plans that if I look at where they stand in sort of broader lead tables of healthcare are relatively small, but what's going on there is that plans we work with and maybe this is some to our credit maybe it’s some to theirs. Certainly it's some to theirs have figured out how to make an HSA qualified product really work to their consumers and their employers and so forth, and guess what they fund more of it. So there is some of that but Darcy any further comments you have on that?

Darcy Mott

No. yes that's correct. 6% is the highest penetration we have in our base.

Mark Marcon

Okay great and then with regards to bringing on so many new plans over the course of the I mean including Bancorp, where there any capacity constraints that you run into or anything along those lines where you are like we have enough coming on and we don't necessarily need to sell any new employer partners. I mean obviously the employer partner growth actually was fantastic, but I'm wondering if there was any moderation on your part whatsoever just given everything that you have going on?

Jon Kessler

I mean the short answer is no, the slightly longer answer is, what is true is that we never want to disappoint any one and as you well know you would really don't get a second chance to make a first impression. If you were to look across our industry at our private as well as public competitors and do some gooling and alike. What you will notice is that there were some folks in the industry that probably got a head of themselves in terms of what they brought on relatively to their operational capacity and planning.

I don’t want to whistle past the graveyard there. This is an operationally intense business and every year we begin planning for January basically it’s like I'm sure somewhere about a week Super Bowl Community for next year is going to start meeting. We kind of have the same situation, but that's probably the metric we think about is we are going to do our best not to bring on business that will create a circumstance where we can't give people a great experience particularly those who are new to our environment.

I will say one thing we do that's really important in this regard is we don't try and sell 100 different things. We are not perfect at it that some people will know, we try to be incredibly flexible and there are times when we sort of look at it and say I wish we didn't do that because it might make our life easier operationally. But we don't sell COBRA. We try and see if our reimbursement accounts business in a box, so that our ancillary that we sell and we focus very tightly on providing great long-term health savings vehicles. And you know what, it turns out that if you focus on something hard enough, it's a little easier to do more of it and that's pretty helpful for our business at this point.

Darcy Mott

And Mark, this is Darcy, Just wanted to add one comment there about the magnitude of what we did and the number of calls. We had record numbers of call in January, how we processed those, but as we look forward, we did the Bancorp transition this last quarter in addition to our open enrollments for year-end and we are going to bring M&T in this quarter. what it speaks to is whether it's through an acquisition or through an open enrollment at year-end, we have the system in place to on-board a lot of accounts and so I think it speaks well and gives us comfort as we go forward to be able to do that.

Jon Kessler

Yes and that’s a great point as it relates for example to acquisition activity. Something we would say to anyone who is think about leaving the business and we know in reality that the sale prices of these are not really - they are important but most important is, these typically customers of the seller institution and there is no body would has the tract record we do of bringing on new relationship successfully.

Again, where it's relationship that our sales team won, relationship that are brand HSAs, it's probably the case that we will do, well it is the case we will do more rollover HSAs this year than we've even done before or whether it's in the context of a bank portfolio type transition. This is something we can do and we can do it at well and we have the numbers to show that not only can we, but we have

Mark Marcon

That's great and then two more if I can sneak in real fast. One would be just per month of account prices for the new accounts that are coming number one and number two any change in any sort of regulatory buys that you are hearing. I mean aside from the Cadillac tax being put off. I've never viewed as being the [gill] (Ph) anything else, thanks?

Jon Kessler

We'll comment on pricing and the like when we give fiscal 2017 guidance in March, I think that's probably the right way to do it. The fiscal year's books aren't even closed yet, so it would be difficult to speak intelligently about the aggregate impact.

Mark Marcon

I was just trying to fund if there is any material difference that you're seeing in terms of new accounts versus old accounts in terms of the way you are structured.

Jon Kessler

Darcy do you want to comment on that one?

Darcy Mott

No but, we are still closing the books and so when we do our fourth quarter call we'll give a lot more in clarity to that.

Mark Marcon

Okay

Jon Kessler

And on the regulatory side, I would note that and Steve if you would like to speak about this, you certainly can. I would note that a bill has been introduced in the Senate and the House that contains various provisions that would expand the use of HSAs, it addresses the availability of HSAs in Medicare Part A and the like as well as the number of smaller areas where the program can be improved.

I don't expect this bill to be passed in its entirety, but I do think that the fact that legislators in both houses continue to get feedback from their constituents about where these things can be made easier and better really speaks to the fact that they are here, they are here to stay and they are going to continue to be refined. And Steve do you want to?

Stephen Neeleman

Yes, the only thing I would add is that it's the Hadge Polson Bill, so I think it's worth a read. because you'll kind of see the different themes that they are hitting on and you know it includes not just expansion into Medicare, but for example, removing the employer contribution, I'm sorry the employee contribution in the Cadillac tax cut relation and things like that.

And so there is a broad we think base of industry support not only with companies like HealthEquity, but we also think consumers now with millions and millions of consumers and employers in the HSA world. They are looking at the HSA bill and saying “look we can always refine it” and so we hope that as hopefully Congress moves forward in different areas that we can slip different parts of these provisions in there.

In other words there are some well documented areas where if a law changes that it could help, but right now we are in pretty good set the way it is, we would love to get some of those Medicare stuff done. We meet the thought that 10,000 people a day are becoming Medicare eligible and aren't able to contribute to their HSA, if they go into the Medicare plan that's something we've been working on for a long time as we've talked about on previous calls.

Mark Marcon

Great figure. Thanks.

Operator

We'll take our next question from Alex Paris with Barrington Research.

Alexander Paris

Hi guys, I know we're getting in the call, so I just have a couple of quick ones. First of all, congratulations on the strong results. You don't give guidance on the number of metrics and that sort of thing, but they were much better than my expectation and they actually represented an increase sequentially in terms of the year-over-year growth rate from the last quarter. My question is, were these better than your internal expectations.

Jon Kessler

Darcy, do you want to comment on that?

Darcy Mott

Well, you are right we do not give guidance on these metrics, and we know that the market numbers will come out from Devenir's, we presume pretty shortly and you know our internal expectations we have high expectations other than the guidance that we give on our earnings I would probably not have any comment.

Alexander Paris

Okay and then secondly, with regard to M&T, just so I understand it, the M&T HSA, the number of HSAs you are going to bring on-board from M&T was not disclosed, you were going to give us some information on that later on, but because it wasn't disclosed why Bancorp was disclosed. Is it safe to assume that it's a smaller number of accounts.

Jon Kessler

Yes.

Alexander Paris

And then secondly, and this would be my last question on M&T Bank, how it differs from you Bank One and…

Jon Kessler

Actually Alex, let me say one other thing I mean M&T is not in Devenir's last year report they list out the Top-20 M&T I don't believe is in that Top-20. So if it were a material number we would have disclosed it.

Alexander Paris

Yes that's what I'm getting at. But M&T is a little different from the Bancorp acquisition in that M&T is going to continue to market these benefit services including you know the HealthEquity HSA is that right?

Jon Kessler

That's right.

Alexander Paris

Okay so do you have other agreements like this or would this be another sort of network partner you know other than an employer or a plan.

Jon Kessler

Well I think that the right analogy is to circumstances where we work with health care brokerages and consultants. I suppose the only difference here is probably a little more on a state land ownership or something of the like because these folks had so much experience selling this thing but I would not assume for the moment that we expect that. All of the sudden most banks are going to become effective at really selling these things, they weren't effective before.

M&T it's the case that it was reasonably effective and they would like to continue that and like to build on that on that sort of knowledge they have and we've work flexibly within the beat to allow them to do that. So I think it's more analogous to some of the benefits brokerages and consultants and the like that we work with.

Alexander Paris

Great, well. Thank you, I appreciate it. Congratulations again.

Jon Kessler

Thank you.

Operator

Will take our next question from Steven Wardell with Leerink Partners.

Steven Wardell

Hey guys good morning.

Jon Kessler

Thanks Steve.

Steven Wardell

So can you tell us about any trends that you are seeing from your network partners especially employers in the past selling season and enrollment season. So are you seeing anything like greater working willingness of employers to educate their employees or to contribute to HSA accounts or preference for HSAs over other consumer directed benefits accounts. Do you see any trends coming out of the past selling season and enrollment season?

Jon Kessler

One big thing and I'm going to ask Steve's to comment on this to focus on year around education and then I want to come back to your second question about patient series versus the other.

Stephen Neeleman

So for all follow us that have been through kind of this big November or late October open enrollment, it's kind of in this lump of information and 200 employees and sometimes people will have a hard time to digest it. The HSA is different and very different than for example a flexible spending account, because the FSA was you got to make your decision in November on how much money you are going to need for the next 13-months good luck. And if you miss it, either you put too much or you didn’t put enough in you are in trouble.

The HSA has this flexibility to be able to put money in throughout the course of the year even up until the next tax year or tax date and so what we're seeing is employers are saying to rather than dumping all of this information in this very busy time in November. Let's do a nice open enrollment then, but now every quarter or sometimes every month let's put out a little snippet, let’s do a little webinar, let’s do some e-mails to explain to people that now it's time to understand how to appropriately fund your HSA.

We think more as better and for sure in all cases. Now let's start to make better choices on how to spend out of your HSA and so that's when some of these transparency tools can get done for their educational campaigns on those types of things and then it's now let's talk about investing because there is the subset of our people have enough money in their account let's start to invest.

And so to Jon's point you have got this year around education which is brand new. I mean maybe in the last two years right, because these are - and people are just starting to accumulate balances or starting to be enough a critical mass to start to drive that and I think Jon will probably talk little bit about - you can talk a little bit about HSAs and HRAs.

Jon Kessler

Yes. On the HSAs relative demand to other accounts, I will say and then for those this maybe a reminder, we do provide as an ancillary product administration of what we internally call reimbursement arrangements so a flexible spending “account” is really a reimbursement arrangement. There is no actual studio account, there is no place with dollars sitting in it and the same thing with the health reimbursement arrangement, which is very similar, but solely funded by an employer.

These accounts as many of you know have - these are the kids that have a certain user loose element to them and or are not portable from employer-to-employer and don’t typically have any kind of interest component or investment component and also require prior to any disbursement from the account the submission of receipts. So they are a little more cumbersome to use and also in the case of - because of those things you may be argue there are a little bit of more of an incentive to spend than an incentive to save.

We saw within our ancillary business here again which is kind of an accommodation from our perspective of noticeable flattening in this business this year and on the one hand again we will do some calculating and figure it out when we provide guidance, but on the hand the bad news is off course that people pay us to do that.

But the good news is that one reason that's happening is that more people are again whether it’s at the employer levels or at the individuals level are saying “you know what one of the real benefits of this HSA stock plan is that I have this really flexible highly consumer friendly and very tax efficient vehicle that comes along with it called an HSA and what the deductible is not much difference than my PPO is. So let's make the job” and so that is something we're seeing.

Unlike the HSA business to my knowledge, there is nobody who actually is able to count these things. Part of the reason the account HSA and feel somewhat good about is that ultimately it takes a few years, but ultimately the IRS tells us that how many people have filed the various HSA forms or how many we and other custodians have filed for. So you can actually count them and verify it, count it some later day, the others are much more ambiguous. And so I would leave to others to comment on where the aggregate market is for those products. But my strong suspicion based on our results and based on common sense is that the other accounts had flattened out considerably.

Steven Wardell

Great and so I think the market has looked at the kind of Cadillac Tax postponement by congress as they are concerned about that. Can you give us your take on the implication of the Cadillac Tax postponement for HealthEquity?

Jon Kessler

Well you know beyond what I have said, there is may be one thing I would add, when we went public, we thought the market with grow that 20% a year out through 2020. We are saying today that if you pull up the most recent investor deck that’s on our site that the market is going to grow that 20% a year after 2020. And so by implication what I am saying is that at least in the short-term there are trends moving in various directions from regulatory perspective, but the market growth that’s been driven by fundamentally mathematical and economic calculations is continuing.

And that’s probably the best thing I can say about it and is to kind of put at least numbers where my words are. The things about the Cadillac Tax is it can push forward demand. Demand is going to be there one way or the other, you can push it forward and if and when it is ultimately implanted it will do so. But what we have tried to comment on and try to set your expectations on very frankly. Is the demand in that is based on economics, because economics tend to have a gravity of their own regulation, especially healthcare has a way of certainly at some level kind of moving around every now and again.

Steven Wardell

Great thanks.

Operator

And there are no further questions. I would like to turn it back to our speakers for any additional or closing remarks.

Jon Kessler

Well thanks to everybody for getting up - well I'm sure it wasn’t getting up early, but nonetheless being with us early and have a great day and we will talk to everybody in March when we release the quarter. Thank you.

Operator

That’s concludes today's conference. We thank you for your participation.

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